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An exact and explicit formula for pricing Asian options with regime switching

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  • Leunglung Chan
  • Song-Ping Zhu

Abstract

This paper studies the pricing of European-style Asian options when the price dynamics of the underlying risky asset are assumed to follow a Markov- modulated geometric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on unobservable states of the economy described by a continuous-time hidden Markov process. We derive the exact, explicit and closed-form solutions for European-style Asian options in a two-state regime switching model.

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  • Leunglung Chan & Song-Ping Zhu, 2014. "An exact and explicit formula for pricing Asian options with regime switching," Papers 1407.5091, arXiv.org.
    • Handle: RePEc:arx:papers:1407.5091
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